Chapter 7

Question 1

Where does inflation come from?

Answer 1

increase in money by the Fed

Question 2

How can consumers spend more money on all goods/services without reducing nominal savings?

Answer 2

the money supply must have increased

Question 3

What does the V stand for in the equation of exchange?

Answer 3

velocity, the amount of times a dollar changes hands

Question 4

What is a common sense interpretation of the equation of exchange?

Answer 4

a years worth of output is bought by the money supply which is spent and re-spent ‘v’ times a year

Question 5

What is the equation of exchange?

Answer 5

M x V = P x Q

Question 6

What are the assumptions the Simple Quantity Theory rests on?

Answer 6

1. over a short period of time resources are limited, so output is limited
2. the speed money moves through the economy is limited

Question 7

What is the prediction of the Simple Quantitttayy theory?

Answer 7

money supply and price are proportionally related. in the short run output and velocity are constant.

Question 8

Who founded the monetarist school of economics?

Answer 8

Milton Friedman

Question 9

What are the assumptions monetarism makes about the Equation of Exchange?

Answer 9

the labor market is in equilibrium in the long run, with the amount of labor supplied equal to the amount of labor demanded. output is not fixed.

Question 10

What is the basic outcome of the helicopter story?

Answer 10

I don’t know

Question 11

Under what conditions would inflation have zero effect?

Answer 11

if the inflation is anticipated and equally spread

Question 12

What is a way to avoid being made worse off by anticipated inflation?

Answer 12

buy goods whose prices inflate before inflation starts

Question 13

T/F, explain. With unanticipated inflation, borrowers win and lenders lose.

Answer 13

True, everyone who has a contract to pay inflated dollars gains while those who receive inflated dollars lose.

Question 14

What is the Real Interest Rate?

Answer 14

The nominal interest rate minus the expected inflation rate

Question 15

What are secured loans?

Answer 15

a loan in which the lender can seize the borrowers property if the loan is not repaid (ex. a house)

Question 16

What are two problems with uneven inflation?

Answer 16

1. we don’t know the real worth of goods

2. creates bubbles

Question 17

What economic school emphasized bubbles?

Answer 17

Austrian School, Hayek, Mises

Question 18

When someone pays an interest rate to someone, what are they paying that person to do?

Answer 18

to delay consumption

Question 19

What is the difference between dollars saved and dollars created by the Fed?

Answer 19

dollars saved have the potential to fuel later consumption and dollars created by the Fed do not.

Question 20

What happens when a Fed created inflationary bubble bursts?

Answer 20

unwanted capital goods and constructions are abandoned and the workers that produced them must find new jobs

Question 21

Why do the Austrians say the government and central bank create bubbles though private markets do not?

Answer 21

because there must be coordinated failures by many firms and individuals. a government money supplier is the best coordinator for this failure.

Question 22

What does it mean to monetize the debt?

Answer 22

the Fed attempts to assist the state in its borrowing by purchasing debt in return for dollars

Question 23

What is inflationary tax?

Answer 23

when the state creates inflation in order to reduce the value of its debt

Question 24

What was the difference between inflation using gold as $ or $ being used as $? $$$$$:)$$$$$

Answer 24

with gold the inflation is low and with the dollars inflation is high

Question 25

What was the cause of inflation in the 1960s?

Answer 25

The Fed monetizing the debt to pay for the Vietnam War.

Question 26

What the heck is a bubble?

Answer 26

money takes some channels more than others and therefore some prices greatly inflate. when the bubble pops, recession happens.

Question 27

How do cucumbers react if the price of gasoline rises?

Answer 27

1. by buying less gasoline (even though they end up spending more on the gas)
2. their demands for other goods fall

Question 28

Can we get inflation from gas prices rising?

Answer 28

No, only the price changes

Question 29

What do ‘P’ ‘M’ and ‘Q’ stand for?

Answer 29

Price Level, Money Supply and Output produced by the economy

Question 30

Who are the two economists recognized for implementing the equation of exchange?

Answer 30

John Stuart Mill and Irving Fisher

Question 31

Who developed the Simple Quantity Theory?

Answer 31

Irving Fisher and Ludwig von Mises

Question 32

If the Fed. Reserve doubles the money supply, how does the equation change?

Answer 32

when the money doubles, the price level doubles. they are proportionally related.

Question 33

What does monetarism say about velocity?

Answer 33

it is not fixed but it does not change much

Question 34

What is the Fed’s objective when they increase money supply?

Answer 34

reduce unemployment

Question 35

What do the monetarists say about the Fed increasing money supply?

Answer 35

It might boost growth and employment in the short run, but in the long run it will cause inflation

Question 36

What is the Real Interest Rate?

Answer 36

the actual interest rate that banks expect it to be

Question 37

What is monetizing the debt?

Answer 37

When the Fed attempts to assist the state in its borrowing by purchasing debt in return for dollars

Question 38

What is an unsecured loan?

Answer 38

a loan with no backing (credit cards)

Question 39

What is investment?

Answer 39

Making capital resources